Financial Statement Comparability and the Informativeness of Stock Prices About Future Earnings

Abstract

We find that financial statement comparability enhances the ability of current period returns to reflect future earnings, as measured by the future earnings response coefficient (FERC). This suggests that comparability improves the informativeness of stock prices and allows investors to better anticipate future firm performance. In addition, using both the FERC and stock price synchronicity tests, we find that comparability increases the amount of firm-specific information (rather than market/industry-level information) reflected in stock prices. Analysts play an important role in improving stock price informativeness by producing more firm-specific information when comparability is high. These findings suggest that comparability lowers the costs of gathering and processing firm-specific information.Comparabilité des états financiers et information sur les résultats futurs livrée par le cours des actions RÉSUMÉ Les auteurs constatent que la comparabilité des états financiers accroît l'aptitude des rendements de l'exercice courant à refléter les résultats futurs, mesurée au moyen du coefficient de réaction des résultats futurs (CRRF). Ce constat donne à penser que la comparabilité améliore la valeur informative du cours des actions et permet aux investisseurs de mieux anticiper la performance future de l'entreprise. De plus, en utilisant à la fois le CRRF et les tests de synchronicité du cours des actions, les auteurs observent que la comparabilité augmente le volume d'information propre à l'entreprise (plutôt que le volume d'information relative au marché ou au secteur * Accepted by Michael Welker. We appreciate helpful comments from Michael Welker, two anonymous reviewers, Ahrum d'activité) livré par le cours des actions. Les analystes jouent un rôle important dans l'amélioration de la valeur informative du cours des actions en produisant davantage d'information propre à l'entreprise lorsque la comparabilité est élevée. Ces observations permettent de croire que la comparabilité diminue les coûts associés à la collecte et au traitement de l'information propre à l'entreprise.

Financial Statement Comparability and Idiosyncratic Return Volatility

“…Third, our results are different from those reported by Choi et al (). In particular, possibly because of estimation error as outlined earlier, Choi et al () failed to show a robust relation between SYNCH (price synchronicity) and COMP (comparability) (Table 6) . This study, on the other hand, shows a strong negative relation between IRV and COMP.…”

“…Choi et al’s () study is related to ours. They examine the impact of financial statement comparability on the future earnings response coefficients (FERC) and stock price synchronicity, and show that comparability improves stock price informativeness.…”

“…Prior studies indicate that earnings may not reflect the true underlying economic events in a timely manner and, therefore, may not synchronize with stock price movements (Hayn ). Second, Choi et al () use R 2 as a measure of stock price informativeness. They contend that a lower R 2 implies that more firm‐specific information is incorporated into stock prices.…”

“…Therefore, they suggest controlling for systematic risk in the empirical specification. However, Choi et al () did not incorporate systematic risk in their regression estimation, which might have introduced bias in their results. Third, our results are different from those reported by Choi et al ().…”

“…However, Choi et al () did not incorporate systematic risk in their regression estimation, which might have introduced bias in their results. Third, our results are different from those reported by Choi et al (). In particular, possibly because of estimation error as outlined earlier, Choi et al () failed to show a robust relation between SYNCH (price synchronicity) and COMP (comparability) (Table 6) .…”